The transformation of big oil.

At a recent Shell shareholder meeting, the challenges of fossil fuels compared to the benefits of renewable energy were a focus of the conversation. CEO, Ben Van Beurden explained to investors the risks and implications involved with big oil embracing clean energy. Mint Selection explores Shell’s plans to diversify and their approach to the clean energy market.

Van Beurden referred to a period some 15 years ago when Shell decided to slowly remove ‘Shell Solar’ from their portfolio. A project with an aim to diversify into renewables, had, in fact, continued to make a loss since day one. Van Beurden emphasises that the solar industry wasn’t the issue, not at all. The lack of success for Shell was simply down to the oil business’s ability to create and manage a different type of business.

Creating an Electricity Business

Over the years, Shell has taken a more cautious approach toward clean energy investment. This, however, has changed recently, with a series of recent acquisitions and plans to accelerate their involvement in clean energy projects. Shell intends to spend up to $2 billion each year, around 8% of its total investment to develop an electricity business. The major challenge with this is determining how to shape this business and what forms of clean energy it should focus on i.e. electric vehicles, wind turbines, solar farms or battery storage facilities. The other challenge to consider is investors attitudes towards the clean energy market and their desire to invest into clean energy projects, an industry that stands polar opposite to their main business focus in the oil and gas market.

Shell’s latest acquisition target involves Dutch utility, Eneco NV, with Maarten Wetselaar, the head of the ‘New Energies’ section at Shell explaining that the business represented what Shell intends to develop in the future. Eneco offers a range of services, including an app that automates electric vehicle charging, enabling customers to top up when prices are low. It provides wind power to charge national infrastructure and has developed a large battery to support the grid with additional power generated on particular days.

Investor Outlook

Investors have varied opinions towards the clean energy market. Many shareholders are concerned about big oil spending money on ventures outside of their core business area. Legal & General Investment Management Ltd., a substantial investor in Shell recently said they were ‘skeptical’ to plans for oil businesses to reshape their core focus. For this investor, they believe the most investor-friendly scenario is to focus on making a managed decline, rather than deploying further capital into large scale renewable energy projects.

While prices have fluctuated over the years, oil has remained the focus for investors. In one particular quarter last year, Shell produced over 160 million barrels of oil, with an average price of $60 per barrel, with an asset value of nearly $10 billion. Let us not forget that oil only makes up two-thirds of the business, with natural gas another substantial part of the Shell portfolio. Data provided from Bloomberg showed that over a ten year period, shareholders received over 150% return on their investment. In comparison, global utilities showed an average return of closer to 1%, so it isn’t surprising that many investors are a little cautious with Shell’s diversification plans.

Reshaping the energy market

Shell believes that rising focus on carbon emissions and government decarbonisation policies will result in the reshaping of the energy system and will cause a rise in electric vehicles, solar, wind and battery storage facilities.

Whilst all of these technologies exist, there is no company that offers all of these services. There are very few businesses who are financially equipped to cover all the investments, but Shell, with its extensive capital reserves, seems to be taking this approach. The capacity to invest $2 billion each year into electricity could give Shell the upper hand on other energy majors such as Siemens AG in the electric vehicle and charging infrastructure market. The challenge is really on how successful Shell is in reshaping their business, with many historical cases proving how difficult it can be to adopt a new business plan.

Investors were somewhat sceptical when New Energies division was launched but attitudes have changed, according to Gainsborough. This was a similar case with natural gas, which has proven to be a great success for Shell. It is likely that oil majors will continue to generate significant profit for the near future despite an expected decline in fossil fuels. Shell, however, like many other oil majors are not content with maintaining a constant steady revenue flow, but instead exploring new alternatives to continue increasing their revenue in the years to come.